Financially Reformed, Maybe

This Wall Street Journal article is reporting that Congress has managed to, apparently, reconcile House and Senate versions of the Financial Regulatory reform bills that previously passed.

Accordingly, this new bill will "prohibit banks from making risky bets with their own funds" however allowing "financial companies to make limited investments in areas such as hedge funds and private-equity funds." This bill would also "limit the ability of federally insured banks to trade derivatives," however, it "would allow banks to trade interest-rate swaps, certain credit derivatives and others—in other words the kind of standard safeguards a bank would take to hedge its own risk."

Party ideology is summed up as "Democrats hailed the agreement as a tool to prevent the kind of taxpayer-funded bailouts that stabilized the economy in 2008 but left divisive scars. Many Republicans said the bill could have unintended consequences, crimping financial markets and access to credit."

However, the major point of contention I have, is that what caused the financial meltdown in late 2008 was the fact that subprime borrowers spurred the collapse by purchasing homes they could neither afford and lied on their applications to get, and in which case, banks repackaged these loans and sold them off as collatoralized debt obligations. Democrats have managed to regulate this, we'll see how effectively in the future, but have failed to curb loose lending practices to the types of borrowers that fueled this.

As the article states, "Government-controlled Fannie Mae and Freddie Mac remain a multibillion dollar drain on the U.S. Treasury, and largely untouched by this proposal." Fannie and Freddie matter because they're the two organizations which buy up subprime mortgages and other smaller mortgages. What does that say about Fannie and Freddie? One could easily speculate that they'll suffer similar collapses as the banks that loaned to these same people. What does that mean? As succinctly as the article said, they'll "remain a multibillion dollar drain on the US Treasury."

Why does this matter? Because together, Freddie and Fannie have about $4.5 trillion in liabilities. That's not to say all their loans will default and the US taxpayer will be on the hook for $4.5 trillion, but even if 20% failed, about equal to the proportion of subprime mortgages your standard bank issued, that's a $900 billion hit. We already owe $12 trillion. How did we get here to begin with? Because of the Community Reinvestment Act of 1979, signed by Jimma Carter, which forced banks to open branches in poor communities and issue loans to poor and subprime borrowers.

We'll never see the type of reform needed for Fannie and Freddie so long as Democrats exists. Their sole purpose in life is to take money from the have mores and give it to the have lesses. Any attempt by financially prudent Republicans will be lambasted as an attack against the poor and hyperbole such as "kicking the poor out of their homes" will be tossed around. Based on Federal Govt tax collections, 53% of us paid Federal Income taxes last year, there's enough have lesses to make sure Democrats have enough power to prevent the necessary regulation of Fannie and Freddie from ever coming about. So much for reform.